1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2005
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Kentucky 61-0912615
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42101
(Address of principal executive offices)
Issuer's telephone number, including area code: (270) 393-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class OUTSTANDING AT AUGUST 15, 2005
Common Stock, no par value 893,643
Transitional Small Disclosure Format: Yes ___ No X
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CITIZENS FIRST CORPORATION
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3-12
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
ITEM 3. Controls and Procedures 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings None
ITEM 2. Unregistered Sales of Equity Securities
and Use of Proceeds None
ITEM 3. Defaults Upon Senior Securities None
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information None
ITEM 6. Exhibits 22
Signatures 23
Exhibits 24-56
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PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2005 DECEMBER 31, 2004
ASSETS
Cash and due from banks ............................................. $ 4,854,740 $ 3,910,629
Federal funds sold .................................................. -- 169,078
------------- -------------
Cash and cash equivalents ....................................... 4,854,740 4,079,707
Available for sale securities ........................................ 12,656,827 12,888,985
Federal Home Loan Bank (FHLB) stock .................................. 599,100 582,800
Mortgage loans held for sale ......................................... 492,175 649,500
Loans ................................................................ 156,553,695 146,950,427
Less allowance for loan losses ....................................... 1,890,776 1,720,565
------------- -------------
Net loans ........................................................ 154,662,919 145,229,862
Premises and equipment, net ......................................... 3,872,168 3,628,317
Interest receivable ................................................. 875,182 788,871
Deferred income taxes ............................................... 318,729 549,292
Goodwill ............................................................ 936,416 936,416
Other assets ........................................................ 327,594 178,336
------------- -------------
Total assets ..................................................... $ 179,595,850 $ 169,512,086
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits ................................................... $ 17,647,948 $ 15,015,304
Savings, NOW and money market deposits ............................ 52,943,993 54,770,108
Time deposits ..................................................... 70,034,769 60,743,325
------------- -------------
Total deposits .................................................. 140,626,710 130,528,737
Federal funds purchased ............................................. 1,273,557 2,500,000
Securities sold under agreements to repurchase ...................... 3,556,919 3,872,532
Long-term debt ...................................................... 14,000,000 13,000,000
Income taxes payable ................................................ -- 155,814
Accrued interest and other liabilities .............................. 1,019,573 1,278,363
------------- -------------
Total liabilities ................................................ 160,476,759 151,335,446
Stockholders' equity:
Preferred stock cumulative;500 shares authorized;
250 shares issued and outstanding; no par value,at
June 30, 2005 and at December 31,2004.............................. 7,659,340 7,659,340
Common stock, no par value, authorized 2,000,000
shares; issued and outstanding 893,643 and 887,719, ............. 10,079,986 9,975,130
shares, respectively at June 30, 2005 and December 31, 2004
Retained earnings ................................................. 1,549,407 851,972
Accumulated other comprehensive income (loss) ..................... (169,642) (309,802)
------------- -------------
Total stockholders' equity ...................................... 19,119,091 18,176,640
------------- -------------
Total liabilities and stockholders' equity ...................... $ 179,595,850 $ 169,512,086
============= =============
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30:
2005 2004
----- ----
INTEREST INCOME
Loans, including fees $2,524,236 $1,940,982
Available-for-sale securities 118,996 126,158
Federal funds sold 6,359 2,653
Dividends on FHLB stock 7,655 5,615
------------------------------------
Total interest income 2,657,246 2,075,408
INTEREST EXPENSE
Deposits 657,152 540,994
Securities sold under agreements to repurchase 8,952 9,354
Long-term debt 82,371 95,318
Federal funds purchased 11,299 4,199
------------------------------------
Total interest expense 759,774 649,865
------------------------------------
NET INTEREST INCOME 1,897,472 1,425,543
Provision for loan losses 85,000 45,000
------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,812,472 1,380,543
------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 213,024 216,465
Other service charges and fees 44,866 39,989
Mortgage banking income 97,443 136,187
Trust referral fees 6,000 3,500
------------------------------------
Total non-interest income 361,333 396,141
NON-INTEREST EXPENSES
Salaries and employee benefits 690,383 769,108
Net occupancy expense 92,773 94,994
Furniture and equipment expense 93,790 100,612
Advertising 52,512 49,122
Professional fees 122,936 147,309
Data processing services 100,165 93,329
FDIC and other insurance 28,927 49,240
Franchise shares and deposit tax 51,150 42,600
Business manager expense 1,845 14,890
Postage, printing and supplies 26,820 23,651
Telephone and other communication 30,858 32,687
Other 117,328 90,593
------------------------------------
Total non-interest expenses 1,409,487 1,508,135
------------------------------------
INCOME BEFORE INCOME TAXES 764,318 268,549
Income tax expense 260,300 85,800
------------------------------------
NET INCOME 504,018 182,749
PREFERRED DIVIDENDS (129,611) -
------------------------------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $374,407 182,749
====================================
BASIC EARNINGS PER COMMON SHARE $0.42 $0.21
DILUTED EARNINGS PER COMMON SHARE $0.35 $0.21
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30:
2005 2004
----- ----
INTEREST INCOME
Loans, including fees $4,803,919 $3,855,602
Available-for-sale securities 238,859 267,653
Federal funds sold 13,584 3,940
Dividends on FHLB stock 13,655 10,544
------------------------------------
Total interest income 5,070,017 4,137,739
INTEREST EXPENSE
Deposits 1,238,835 1,092,721
Securities sold under agreements to repurchase 16,894 19,539
Long-term debt 148,261 210,699
Federal funds purchased 21,844 10,680
------------------------------------
Total interest expense 1,425,834 1,333,639
------------------------------------
NET INTEREST INCOME 3,644,183 2,804,100
Provision for loan losses 120,000 120,000
------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,524,183 2,684,100
------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 405,170 409,400
Other service charges and fees 83,989 68,337
Mortgage banking income 195,070 214,996
Net realized (losses) on sale of available-for-sale securities - (34,368)
Trust referral fees 9,000 6,500
------------------------------------
Total non-interest income 693,229 664,865
NON-INTEREST EXPENSES
Salaries and employee benefits 1,360,859 1,531,541
Net occupancy expense 180,585 183,991
Furniture and equipment expense 188,429 213,169
Advertising 90,544 91,764
Professional fees 217,591 204,969
Data processing services 190,343 183,961
FDIC and other insurance 59,658 99,314
Franchise shares and deposit tax 102,300 55,347
Business manager expense 5,981 28,409
Postage, printing and supplies 54,553 50,892
Telephone and other communication 61,836 65,173
Other 256,699 160,478
------------------------------------
Total non-interest expenses 2,769,378 2,869,008
------------------------------------
INCOME BEFORE INCOME TAXES 1,448,034 479,957
Income tax expense 492,800 151,600
------------------------------------
NET INCOME 955,234 328,357
PREFERRED DIVIDENDS (257,798) -
-------------------------- ---------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $697,436 328,357
====================================
BASIC EARNINGS PER COMMON SHARE $0.78 $0.37
DILUTED EARNINGS PER COMMON SHARE $0.67 $0.37
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2005 2004
Balance January 1 $ 18,176,640 $ 9,610,377
Net income ........................................ 955,234 328,357
Issuance of common stock .......................... 104,856 54,150
Payment of preferred dividends, $1,031.19 per share (257,799) --
Other comprehensive income (loss), net of tax ..... 140,160 (211,681)
------------ ------------
Balance at end of period ............................ $ 19,119,091 $ 9,781,203
============ ============
See accompanying notes to condensed consolidated financial statements.
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30:
2005 2004
---- ----
Net income .................................................. $ 955,234 $ 328,357
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale
securities, net of income taxes (benefits) of $72,203 and
$(109,048), arising during the period, respectively....... 140,160 (211,681)
-------- ---------
Comprehensive income $ 1,095,394 $ 116,676
=========== ==========
See accompanying notes to condensed consolidated financial statements.
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30:
2005 2004
---- ----
Net income ................................................... $ 504,018 $ 182,749
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale
securities, net of income taxes (benefits) of $143,615 and
$(324,001), arising during the period, respectively........ 278,783 (628,944)
--------- --------
Comprehensive income ......................................... $ 782,801 $ 446,195
========= =========
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2005 2004
---- ----
OPERATING ACTIVITIES:
Net income ................................................. $ 955,234 $ 328,357
Items not requiring (providing) cash:
Depreciation and amortization ............................. 165,570 243,135
Provision for loan losses ................................. 120,000 120,000
Amortization of premiums and discounts on securities ...... 7,235 11,191
Loss on sale of property, plant and equipment ............. -- 1,071
Loss on sale of other real estate owned ................... 6,803 --
Deferred income taxes (benefits) .......................... 105,317 (371,831)
Net realized losses on disposition of investment securities -- 34,368
Gains on sales of loans ................................... (164,703) (179,460)
Sale of mortgage loans held for sale ...................... 10,954,191 10,263,712
Origination of mortgage loans for sale ..................... (10,632,163) (9,823,437)
FHLB stock dividend received .............................. (13,500) (10,300)
Changes in:
Interest receivable ....................................... (86,311) (10,475)
Income taxes receivable ................................... 45,496 95,838
Other assets .............................................. 52,630 168,068
Interest payable and other liabilities .................... (278,486) 189,374
------------ ------------
Net cash from operating activities ............... 1,237,313 1,059,611
INVESTING ACTIVITIES:
Net changes in loans ........................................ (9,818,201) (3,864,293)
Purchases of premises and equipment ......................... (409,421) (40,228)
Proceeds from sale of property, plant and equipment ......... -- 625
Proceeds from maturities of securities available for sale ... 437,286 446,193
Proceeds from sales of available-for-sale securities ........ -- 4,727,438
Purchase of FHLB stock ...................................... (2,800) (135,300)
Proceeds from sale of other real estate owned ............... 264,929 --
Payment related to purchase of Commonwealth Mortgage and
Southern KY Land Title, Inc., net of stock issued ......... (251,717) (162,401)
------------ -----------
Net cash from investing activities ................ (9,779,924) 972,034
FINANCING ACTIVITIES:
Net increase in demand deposits, ............................ 806,529 6,436,246
money market, NOW, and savings accounts
Net increase (decrease) in certificates of deposit ........... 9,291,444 (6,686,725)
Proceeds from long-term borrowings ........................... 1,000,000 2,000,000
Net decrease in federal funds ................................ (1,542,056) (684,496)
purchased and repurchase agreements
Issuance of common stock .................................... 20,950 54,149
Dividends paid on preferred stock ........................... (259,223) --
------------ ------------
Net cash from financing activities .......................... 9,317,644 1,119,174
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................... 775,033 3,150,819
Cash and cash equivalents at beginning of period ............ 4,079,707 5,233,396
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 4,854,740 $ 8,384,215
============ ============
Supplemental Cash Flow Information:
Cash paid for interest ...................................... $ 1,495,863 $705,490
Cash paid for income taxes .................................. $ 615,500 $ -
Real estate acquired in settlement of loans: ................. $ 265,144 $ -
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Corporation (the
"Company") and its subsidiary, Citizens First Bank, Inc. (the "Bank"), conform
to accounting principles generally accepted in the United States of America and
general practices within the banking industry. The condensed consolidated
financial statements include the accounts of the Company and the Bank. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2004 filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been reflected in the accompanying unaudited financial
statements. Results of interim periods are not necessarily indicative of results
to be expected for the full year. Those adjustments consist only of normal
recurring adjustments. The condensed consolidated balance sheet of the Company
as of December 31, 2004, has been derived from the audited consolidated balance
sheet of the Company as of that date.
STOCK OPTION PLANS
All references to stock options, earnings per share and the amount of common
stock issued and outstanding have been adjusted to reflect the 5% common stock
dividend that was paid on May 30, 2005, to record holders of common stock on
April 29, 2005.
On December 9, 2002, the board of directors adopted the 2002 Stock Option Plan,
which became effective subject to the approval of the Company's shareholders at
the annual meeting in April 2003. The purpose of the plan is to afford key
employees an incentive to remain in the employ of the Company and its
subsidiaries and to use their best efforts on its behalf. 126,000 shares of
Company common stock have been reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003 Stock Option Plan
for Non-Employee Directors, which became effective subject to the approval of
the Company's shareholders at the annual meeting in April 2003. The purpose of
the plan is to assist the Company in promoting a greater identity of interest
between the Company's non-employee directors and shareholders, and in attracting
and retaining non-employee directors by affording them an opportunity to share
in the Company's future successes. 42,000 shares of common stock have been
reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for Non-Employee
Directors were approved at the Company's Annual Meeting of Shareholders on April
17, 2003. On January 14, 2004, the Company granted options to purchase 42,000
shares under the employee stock option plan and 5,250 shares under the
non-employee stock option plan. On May 20, 2004, the Company granted options to
purchase 4,725 shares under the non-employee stock option plan. On January 12,
2005, the Company granted options to purchase 42,000 shares under the employee
stock option plan. The Company on April 21, 2005, granted options to purchase
6,300 shares under the non-employee stock option plan.
The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under this plan had an exercise price
equal to the market value of the
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underlying common stock on the grant date. The following tables illustrates
the effect on net income and earnings per share if the Company had applied the
fair value provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation,
for the quarter and six months ended June 30, 2005 and 2004.
Quarter Ended June 30
2005 2004
---------------------------
Net income, as reported ......................... $ 504,018 $ 182,749
Less: Total stock-based employee compensation
cost determined under the
fair value based method, net of income taxes .... 50,861 17,691
Pro forma net income ............................ $ 453,157 $ 165,058
Earnings per share:
Basic - as reported ............................. $ 0.42 $ 0.21
Basic - pro forma ............................... $ 0.36 $ 0.19
Diluted - as reported ........................... $ 0.35 $ 0.21
Diluted - pro forma ............................. $ 0.31 $ 0.19
Six Months Ended June 30
2005 2004
---------------------------
Net income, as reported ......................... $ 955,234 $ 328,357
Less: Total stock-based employee compensation
cost determined under the
fair value based method, net of income taxes .... 97,196 35,275
Pro forma net income ............................ $ 858,038 $ 293,082
Earnings per share:
Basic - as reported ............................. $ 0.78 $ 0.37
Basic - pro forma ............................... $ 0.67 $ 0.33
Diluted - as reported ........................... $ 0.67 $ 0.37
Diluted - pro forma ............................. $ 0.60 $ 0.33
The Company's 2002 Stock Option Plan is a fixed option plan under which the
Company may grant options that vest over 3 years to selected employees for up to
126,000 shares of common stock. The Company's 2003 Stock Option Plan is a fixed
option plan under which the Company may grant options that vest immediately to
selected non-employee directors for up to 42,000 shares of common stock. The
exercise price of each option is intended to equal the fair value of the
Company's stock on the date of grant. An option's maximum term is 10 years.
A summary of the status of the plans at June 30, 2005 and 2004, and changes
during the periods then ended is presented below:
2005 2004
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
Outstanding, beginning of year 51,035 $ 13.50 -- $ --
Granted 48,305 14.44 51,980 13.51
Exercised (1,575) 13.30 --
Forfeited (1,366) 13.57 --
Expired -- -- --
Outstanding, end of period 96,399 $ 13.98 51,980 $ 13.51
Options exercisable, end of period 27,926 9,975
The fair value of options granted is estimated on the date of the grant using an
option-pricing model with the following weighted-average assumptions:
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2005
--------------
Dividend yields 0%
Volatility factors of expected market price of common stock 22.46%
Risk-free interest rates 3.77%
Expected life of options 6 Years
Weighted-average fair value of options granted during the year $ 4.73
The following table summarizes information about stock options under the plans
outstanding at June 30, 2005:
Options Outstanding Options Exercisable
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$13.57 39,694 8.5 years $13.57 13,226 $13.57
$13.57 4,200 8.5 years $13.57 4,200 $13.57
$12.76 4,200 9 years $12.76 4,200 $12.76
$14.33 42,005 9.5 years $14.33 -- $14.33
$15.19 6,300 10 years $15.19 6,300 $15.19
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 financial statement presentation. These reclassifications
had no effect on net earnings.
(3) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the stated periods was as follows:
June 30, June 30,
2005 2004
------------------------
Balance, beginning of year ............................... $ 1,720,565 $ 1,904,377
Provision charged to expense ............................. 120,000 120,000
Loans charged off, net of recoveries of $138,571 for June
30, 2005 and $5,120 for June 30, 2004 ................... 50,211 (26,170)
----------- -----------
Balance, June 30, 2005 and June 30, 2004, respectively .. $ 1,890,776 $ 1,998,207
=========== ===========
(4) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last ten trading days of the applicable
calendar year. At the former Commonwealth shareholders' option, an additional
25% of such deferred purchase price, if any, may be paid in shares of the
Company's common stock. The deferred contingent purchase price is accounted for
as additional purchase price at the time the contingency is resolved. The Bank
also purchased the .2 acre site on which the main office of Commonwealth
Mortgage is located for a purchase price of $272,500 in cash. Goodwill
recognized in the initial transaction amounted to $380,000. In January 2004, the
Bank paid $162,401 in cash, and in April 2004 the Company issued 3,790 shares of
the Company's common stock, to the former Commonwealth shareholders as the first
installment of the deferred contingent purchase price. In January 2005, the Bank
paid $251,717 in cash, and in March 2005 the Company issued 5,778 shares of the
Company's
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common stock to the former Commonwealth shareholders as the second
installment of the deferred contingent purchase price. At June 30, 2005,
goodwill from this transaction totaled $936,416.
The acquisition of Commonwealth Mortgage and Southern Kentucky Land Title was
completed to give the Bank an expanded presence in the local mortgage
origination market, to further expand the Bank's customer service offerings and
to supplement the Bank's non-interest fee income.
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING
The Company completed during the third quarter of 2004 the private placement of
250 shares of Cumulative Convertible Preferred Stock, stated value $31,992 per
share (Preferred Stock), for an aggregate purchase price of $7,998,000. The
Preferred Stock was sold for $31,992 per share, is entitled to quarterly
cumulative dividends at an annual fixed rate of 6.5% and is convertible into
shares of common stock of the Company at an initial conversion price per share
of $15.50 on and after three years from the date of issuance. The sale of the
Preferred Stock netted proceeds to the Company of $7,659,340, of which
$3,011,970 (including $3,000,000 in principal and $11,970 in accrued interest)
was used to repay the outstanding balance under the Company's line of credit,
and $3,800,000 was contributed to the capital of the Bank. The remaining
proceeds from the issuance of the Preferred Stock are being used for general
corporate purposes, including the contribution of capital to the Bank.
(6) EARNINGS PER SHARE
On April 20, 2005, the Board of Directors declared a 5% common stock dividend to
shareholders of record on April 29, 2005, payable May 30, 2005. All references
to common shares and earnings per share have been restated to reflect the stock
dividend. There are no anti-dilutive stock options. Basic earnings per share
have been computed by dividing net income available for common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share have been computed the same as basic earnings per share, and
assumes the conversion of outstanding vested stock options and convertible
preferred stock. The following table reconciles the basic and diluted earnings
per share computations for the quarters and six months ending June 30, 2005 and
2004.
QUARTER ENDED JUNE 30, 2005 QUARTER ENDED JUNE 30, 2004
------------------------------------- ----------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PER SHARE SHARES PER SHARE
INCOME AMOUNT INCOME AMOUNT
------------------------------------- ----------------------------------------
BASIC EARNINGS PER SHARE
Net income $ 504,018 $ 182,749
Less: Dividends on
preferred stock (129,611) -
---------- ----------
Net income available
to common shareholders 374,407 893,643 $ 0.42 182,749 885,677 $ 0.21
======== ========
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred 541,800
stock 129,611 - -
Stock options - 2,848 - -
---------- --------- ---------- ---------
DILUTED EARNINGS (LOSS)
PER SHARE
Net income available to
common shareholders and
assumed conversions
$ 504,018 1,438,291 $ 0.35 $ 182,749 885,677 $ 0.21
========== ========= ======== ========== ======= ========
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SIX MONTHS ENDED JUNE 30, 2005 SIX MONTHS ENDED JUNE 30, 2004
------------------------------------- ----------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PER SHARE SHARES PER SHARE
INCOME AMOUNT INCOME AMOUNT
------------------------------------- ----------------------------------------
BASIC EARNINGS PER SHARE
Net income $ 955,234 $ 328,357
Less: Dividends on
preferred stock (257,799) -
---------- ----------
Net income available
to common shareholders 697,435 891,101 $ 0.78 328,357 884,073 $ 0.37
======== ========
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred 541,800
stock 257,799 - -
Stock options 0 2,389 - -
---------- --------- ---------- ---------
Diluted earnings (loss)
per share
Net income available to
common shareholders and
assumed conversions
$ 955,234 1,435,290 $ 0.67 $ 328,357 884,073 $ 0.37
========== ========= ======== ========== ======= ========
(7) EMPLOYEE BENEFIT PLAN
Effective October 1, 2004, the Company elected to self-insure certain costs
related to employee health and accident benefit programs. The Company has
purchased insurance that limits its annual exposure for individual claims and
that limits its aggregate annual exposure to $118,641 during the initial year of
the plan. Future insurance costs that limit the Company's exposure for
individual claims and aggregate exposure will be determined annually, based
primarily upon the Company's actual claim history for the previous year.
(8) COMMON STOCK DIVIDEND
On April 20, 2005, the Board of Directors of the Company declared a 5% stock
dividend on each share of common stock of the Corporation outstanding, payable
to the record holders of the common stock on April 29, 2005. The dividend was
issued and payable May 30, 2005 in the form of 0.05 share of common stock for
each one share of common stock outstanding on the record date. Any fractional
share of common stock which a shareholder would be entitled to receive was
rounded up to a whole share of common stock. A total of 42,584 shares of common
stock were issued as a result of common stock dividend.
(9) SUBSEQUENT EVENTS
Subsequent to quarter end, Citizens First Bank purchased, for $3,750,000, a
30,000 square foot building, located in Bowling Green, KY, to be used as a
headquarters building. The Bank anticipates using approximately 15,000 square
feet of the building, and leasing the remaining space. The Bank offices will
primarily be occupied by senior management, commercial lenders, deposit
operations, loan accounting, finance, and information systems personnel. The
purchase price was funded through the acquisition of deposits generated by the
Bank.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Citizens First Corporation ("the Company") was incorporated in Kentucky on
December 24, 1975 for the purpose of conducting business as an investment club,
and is headquartered in Bowling Green, Kentucky. In late 1998 and early 1999,
the Company received regulatory approval to become a bank holding company under
the Bank Holding Company Act of 1956, as amended (the"BHCA"), through its
organization and ownership of its subsidiary, Citizens First Bank, Inc. (the
"Bank"). On February 17, 1999 the Company completed the initial public offering
of the sale of 536,667 shares of its no par value common stock. The Company,
through the Bank, is now involved in the banking business, primarily serving
customers in the Bowling Green/Warren County market and in the Franklin/Simpson
County market. As of June 30, 2005, the Company and Bank employed sixty-four
employees (fifty-seven full-time equivalent employees).
The Bank commenced operations as a newly chartered commercial bank in February
1999 at 1805 Campbell Lane, Bowling Green, Kentucky. The Bank opened a branch
office at 901 Lehman Avenue, Bowling Green, Kentucky in March 1999. In January
2003 the Bank acquired Commonwealth Mortgage and Southern Kentucky Land Title,
Inc. located at 1301U.S. Highway 31-W Bypass in Bowling Green, Kentucky. The
Bank opened branch offices at 2451 Fitzgerald-Industrial Drive, Bowling Green,
Kentucky and at 1200 South Main Street, Franklin, Kentucky in February 2003.
Subsequent to quarter end, the Bank purchased a 30,000 square foot office
building, located at 1065 Ashley Street in Bowling Green, Kentucky. The Bank has
received permission from the appropriate regulatory authorities to move its
headquarters to this facility, and also to open a retail branch in the building.
The Bank was organized as a community oriented, full service alternative to the
super-regional financial institutions which dominate its primary service area.
The Bank's mission is to firmly establish itself in its primary service area as
a community owned and operated full-service bank providing traditional products
and services typically offered by commercial banks. The Bank believes that its
ability to compete is enhanced by its local management and its base of local
shareholders and directors. The Bank has emphasized and intends to continue
emphasizing its Bowling Green and southern Kentucky roots, and the Bank has a
philosophy of giving its customers prompt and responsive personal service.
The Company's corporate strategy focuses on providing the Bank's customers with
high quality, personal banking services. The Bank offers products designed to
meet the needs of its customers that include individuals, small businesses,
partnerships and corporations. The Bank provides a full range of corporate and
retail banking services that include checking, savings, and time deposit
accounts; secured and unsecured loans to corporations, individuals, and others;
letters of credit; rental of safe deposit boxes; and cash management services.
The Bank also offers, through affiliations with third parties, trust services,
investment management services, and business and personal insurance products.
The Bank offers a full range of deposit services. Checking account services
include regular non-interest bearing checking accounts as well as interest
bearing negotiable order of withdrawal ("NOW") accounts. Savings and certificate
of deposit accounts include accounts ranging from a daily maturity (regular
savings and also money market accounts) to longer-term certificates as
authorized by law. In addition, retirement accounts such as IRA's (Individual
Retirement Accounts) are available. All deposit accounts are insured by the
Federal Deposit Insurance Corporation to the full amount permitted by law.
Deposit accounts are solicited from individuals, businesses, professional
organizations and governmental authorities.
Lending services include a full range of commercial, personal, and mortgage
loans. The Bank's primary focus is on business lending. The types of commercial
loans that are available include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements) and purchase of machinery and
equipment. The Bank does not emphasize real estate lending for land acquisition,
land development or open-end construction loans. The types of personal loans
that are available include secured and unsecured loans for such purposes as
financing automobiles, home improvements, education and personal investments.
The Bank originates, processes and closes residential real estate loans that are
then primarily sold on the secondary market (each individually) to a
correspondent.
The Bank offers credit cards (through correspondent banking services) including
MasterCard (TM) and Visa(TM) as well as a personal checking account related line
of credit. The line of credit is available for both protection against
unexpected overdrafts and also for the convenience of having a pre-arranged loan
that can be activated simply by a
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check drawn on a personal checking account.Other services offered include, but
are not limited to, safe deposit boxes, letters of credit, travelers checks,
direct deposit of payroll, social security and dividend payments and automatic
payment of insurance premiums and mortgage loans. The Bank does not have a
proprietary automated teller machine network but participates in a national ATM
network through the FiServ EFT network, and through the Visa Debit Card Program.
The Bowling Green economy is diversified, with financial and other service
industries representing the largest industry segment. The local unemployment
rate of approximately 4.2% is lower than the national unemployment rate of
approximately 5.0%. The Company's competition in the local market consists
mainly of regional and national financial institutions. In the Bank's primary
service area, there are 14 commercial banks, of which 4 are considered to have
their headquarters in the Bank's service area. In addition, there are various
credit unions, mortgage companies, and other commercial banks that have loan
production offices in the area. The Bank encounters strong competition from
these financial institutions, for deposits, loans, and other financial services,
as well as from insurance companies, brokerage firms and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Many of these competitors have substantially greater
resources and lending limits than the Bank has to offer and certain services,
such as international banking services, which the Bank is not providing.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the financial services industry. The most significant
accounting policies followed by the Company are presented in Note 1 of the Notes
to the Condensed Consolidated Financial Statements included in this report.
These policies, along with the disclosures presented in the other financial
statement notes and in this financial review, provide information on how
significant assets and liabilities are valued in the financial statements and
how those values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective or complex judgments, and as such could be most subject to
revision as new information becomes available.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's 2004 Annual Report on Form 10-KSB describes the
methodology used to determine the allowance for loan losses, and a discussion of
the factors driving changes in the amount of the allowance for loan losses is
included under "Asset Quality" below.
Loans that exhibit probable or observed credit weaknesses are subject to
individual review. Where appropriate, reserves are allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options
available to the Company. Included in the review of individual loans are those
that are impaired as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. Historical
loss rates are applied to other loans not subject to reserve allocations. These
historical loss rates may be adjusted for significant factors that, in
management's judgment, reflect the impact of any current conditions on loss
recognition. Factors which management considers in the analysis include the
effects of the national and local economies, trends in the nature and volume of
loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset
quality trends, risk management and loan administration, changes in internal
lending policies and credit standards, and examination results from bank
regulatory agencies and the Company's internal credit examiners.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring losses when evaluating reserves for individual loans or pools of
loans. Reserves on individual loans and historical loss rates are reviewed
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quarterly and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.
The Company has not substantively changed any aspect to its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Based on the procedures discussed above, management is of the opinion that the
reserve of $1,890,776 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at June 30, 2005.
RESULTS OF OPERATIONS
For the three months ended June 30, 2005, the Company reported net income of
$504,018, or $0.42 and $0.35 per basic and diluted common share, respectively,
compared to net income of $182,749, or $.21 per basic and diluted common share,
for the same period ended June 30, 2004.
For the six months ended June 30, 2005, the Company reported net income of
$955,234, or $0.78 and $0.67 per basic and diluted common share, respectively,
compared to net income of $328,357, or $0.37 per basic and diluted common share,
for the same period ended June 30, 2004.
NET INTEREST INCOME
Net interest income was $1,897,472 in the second quarter of 2005, compared with
$1,425,543 in the comparable period in 2004. Second quarter 2005 interest income
of $2,657,246, an increase of $581,838 or 28.0% over the same period total of
$2,075,408 in 2004, includes $2,524,236 income on loans, $118,996 income on
securities, and $14,014 income on federal funds sold and other interest-bearing
accounts. Interest income of $2,075,408 during the second quarter of 2004
included $1,940,982 of income on loans, $126,158 income on investment
securities, and $8,268 income on federal funds sold and other interest-bearing
accounts. Interest expense of $759,774 for the second quarter of 2005, up
$109,909 or 16.9% from the same period in 2004, consists of interest on deposits
of $657,152, and on other borrowings of $102,622. Second quarter 2004 interest
expense of $649,865 consisted of interest on deposits of $540,994, and interest
on other borrowings of $108,871. An increase in yields on interest earning
assets, coupled with an increase in the amount of interest earning assets,
contributed to the increase in net interest income in the second quarter of
2005, compared to the same quarter of 2004. Income from available-for-sale
securities is down from the second quarter of 2004 primarily because of a
decrease in average securities for the period. The increase in interest expense
in the second quarter of 2005, compared to the same period of 2004, was due to
both the increased average cost of deposits during 2005, after short term rates
have increased by 225 basis points since the current rate trend started in mid
2004, and the increased average amount of interest bearing deposits compared to
the second quarter of 2004. The decrease in long-term debt is due to the payoff
in the third quarter of 2004 of $3,000,000 of debt at the Company, using
proceeds from the issuance of cumulative convertible preferred stock completed
during the third quarter of 2004. The increase in yields on interest earning
assets during the second quarter of 2005, compared to the same period of 2004,
is primarily attributable to the increase by 225 basis points of short-term
interest rates since late June 2004. The Bank is asset sensitive, meaning assets
reprice faster to changes in short-term rates than do liabilities. In a rising
short-term rate environment, such as occurred during the second quarter of 2005,
more of the Bank's interest earning assets, primarily loans, reprice up faster
than do the liabilities, specifically certificates of deposit, which provide the
funding for the assets.
Net interest income was $3,644,183 for the six months ended June 30, 2005, an
increase of $840,083 or 30.0% over the total of $2,804,100 for the same period
of 2004. Interest income of $5,070,017 for the first six months of 2005 included
$4,803,919 income on loans, $238,859 income on investment securities, and
$27,239 income on federal funds sold and other interest-bearing accounts. Total
interest income of $4,137,739 for the first six months of 2004 consisted of
$3,855,602 income on loans, $267,653 income on investment securities, and
$14,484 income on federal funds sold and other interest-bearing accounts.
Interest expense for the first six months of 2005 totaled $1,425,834, and
included $1,238,835 interest on deposits, and $186,999 expense on other
borrowings. The comparable period of 2004 had interest expense of $1,333,639, of
which $1,092,721 was interest on deposits, and $240,918 was expense on other
borrowings.
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PROVISION FOR LOAN LOSSES
The provision for loan losses expense for the quarter ended June 30, 2005, was
$85,000, an increase of $40,000 over the total of $45,000 for the same quarter
of 2004. As shown in the table in Footnote 3, the Company had net recoveries of
loans charged off totaling $50,211 for the second quarter of 2005, compared to
net charge-offs totaling $26,170 for the same quarter of 2004, a positive
variance of $76,381. The increase in the provision expense for the second
quarter of 2005, compared to the same quarter of 2004, was due to the overall
increase in loans, requiring an allocation for loan losses for the unallocated
reserve. See a discussion of asset quality included in the Asset Quality section
of the Balance Sheet Review.
The provision for loan losses expense was $120,000 for the first half of 2005,
equal to the $120,000 for the same period of 2004.
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 2005 and 2004,
respectively, was $361,333 and $396,141, a decrease of $34,808 or 8.8%. Income
from service charges on deposit accounts decreased $3,441, or 1.6%, to $213,024
during the second quarter of 2005 from $216,465 for the second quarter of 2004.
Despite an overall increase in deposit accounts for the periods, fee income from
insufficient fund charges decreased, offsetting other account fees. Income from
mortgage banking decreased $38,744, to $97,443 during the second quarter of 2005
from $136,187 in the same period of 2004. The decrease in mortgage banking
income in 2005 is primarily due to increased competition in the local market, as
the company reduced fees charged to customers, to maintain market share.
Non-interest income for the six months ended June 30, 2005 and 2004,
respectively, was $693,229 and $664,865, an increase of $28,364 or 4.3%. Service
charges on deposit accounts comprised the largest part of non-interest income
for both six-month time periods, totaling $405,170 and $409,400 for 2005 and
2004, respectively. Income from mortgage banking decreased to $195,070 for the
first six months of 2005 from $214,996 for the same period of 2004. Losses from
the sale of investment securities during the first six months of 2004 totaled
$34,368, compared to no activity for the same period of 2005.
NON-INTEREST EXPENSE
Non-interest expense was $1,409,487 in the second quarter of 2005, down from
$1,508,135 in the same quarter of 2004, a decrease of $98,648 or 6.5%. A
decrease in salary and employee benefit expense of $78,725, due primarily to a
reduction in FTE's, coupled with a decrease of $24,373 in professional fees,
primarily legal fees, accounted for significant variances compared to the same
period in 2004.
For the six months ended June 30, 2005 and 2004, respectively, non-interest
expense was $2,769,378 and $2,869,008, a decrease of $99,630, or 3.5%. A
decrease in salary and employee benefit expense of $170,682, due primarily to a
reduction in FTE's, was the largest positive variance comparing the first half
of 2005 to 2004. Franchise shares and deposit tax was up $46,953 compared to
2004, primarily due to an adjustment made to the 2004 total. The increase in
other non-interest expense is associated with a number of accounts, with the
largest variances compared to the first half of 2004 comprising an increase of
$25,581 in correspondent bank charges, and $20,976 in fees associated with
maintaining and disposing of property in the other real estate owned category.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2005. During the second quarter of 2005, income tax expense totaled
$260,300 compared to $85,800 for the same period of 2004. For the first half of
2005, income tax expense totaled $492,800, compared to $151,600 during the same
period of 2004. Deferred tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of assets
and liabilities.
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BALANCE SHEET REVIEW
OVERVIEW
Total assets at June 30, 2005 were $179,595,850, up from $169,512,086 at
December 31, 2004 and up from $164,735,856 a year ago. Average total assets for
the second quarter of 2005 were $176,669,278, up $13,785,141 from the second
quarter of 2004 average of $162,884,137.
LOANS
At June 30, 2005 loans (excluding mortgage loans held for sale) totaled
$156,553,695, compared with $146,950,427 at December 31, 2004 and $138,553,598 a
year ago, an increase of $9,603,268 and $18,000,097 respectively. Loans averaged
$152,885,927 during the second quarter of 2005, an increase of $14,345,200 or
10.4%, over the average total of $138,540,727 for the second quarter of 2004.
ASSET QUALITY
Non-performing loans are defined as non-accrual loans, loans accruing but past
due 90 days or more, and restructured loans. Management classifies commercial
and commercial real estate loans as non-accrual when principal or interest is
past due 90 days or more and the loan is not adequately collateralized and is in
the process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Consumer loans are charged off after 120 days of delinquency unless
adequately secured and in the process of collection. Non-accrual loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain. Loans are categorized as
restructured if the original interest rate, repayment terms, or both were
restructured due to deterioration in the financial condition of the borrower.
However, restructured loans that demonstrate performance under the restructured
terms and that yield a market rate of interest may be removed from restructured
status in the year following the restructure.
The Bank had non-performing loans totaling $533,141 at June 30, 2005, compared
to $720,041 at December 31, 2004 and $1,644,610 at June 30, 2004. Included in
the non-performing loan total at June 30, 2005 is the remaining portion,
totaling $518,052, of three loans to one borrower, that were placed on
non-accrual status during the second quarter of 2003. The three loans,
originally totaling $1,675,000, are secured by substantially all the assets of
the borrower and the guaranties of three individuals, a limited partnership and
a limited liability company. During the third quarter of 2003, $1,043,050 of
these loans was charged off, and approximately $112,000 was paid against the
balance of the loans. The borrower's assets consist primarily of interests in
energy related properties located in Texas and Louisiana. During the second
quarter of 2003 the borrower advised the Company that one of the properties,
which it had expected to produce significant revenues, had failed to produce any
revenue, was unlikely to ever produce revenues and that the property's value is
now negligible, and further that the revenue from the other properties was
expected to be minimal. The borrower terminated its operations during the second
quarter of 2003. The Bank is pursuing recovery in full of the aforementioned
loans through various legal proceedings, which are expected to culminate by the
end of 2005. Also included in the June 30, 2005 non-performing loan total are
two loans totaling $15,089 that were greater than 90 days past due.
Non-performing assets are defined as non-performing loans, foreclosed real
estate, and other foreclosed property. The Bank had non-performing assets of
$533,141 at the end of the second quarter of 2005, comprised of the above
mentioned non-performing loans. The Bank had non-performing assets of $720,041
at December 31, 2004, comprised entirely of non-performing loans.
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance for loan losses was $1,890,776 at June 30,
2005, an increase of $170,211, or 9.9% over the December 31, 2004 level of
$1,720,565. The allowance represents 1.21% of period-end loans, compared to
1.17% of period-end loans at December 31, 2004. The allowance as a percentage of
period-end loans increased at June 30, 2005, compared to December 31, 2004,
because of the increase in the unallocated portion of the loan portfolio, which
is maintained to recognize the imprecision in estimating and measuring losses.
The level of the allowance is based on management's and the Bank Board of
Directors Loan Committee's ongoing review and evaluation of the loan portfolio
and general economic conditions on a monthly basis and by the full Board of
Directors on a quarterly basis. Management's review and evaluation of the
allowance for loan losses is based on an analysis of historical trends,
significant problem
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loans, current market value of real estate or collateral and certain economic
and other factors affecting loans and real estate or collateral securing these
loans. Where appropriate, reserves are allocated to individual loans based on
management's estimate of the borrower's ability to repay the loan given the
availability of collateral, other sources of cash flow and legal options
available to the Company. Historical loss rates are applied to other loans not
subject to reserve allocations. An unallocated reserve is maintained to
recognize the imprecision in estimating and measuring losses when evaluating
reserves for individual loans or pools of loans. These historical loss rates may
be adjusted for significant factors that, in managements judgment, reflect the
impact of any current conditions on loss recognition, including the effects of
the national and local economies, trends in the nature and volume of loans
(delinquencies, charge-offs and nonaccrual loans), changes in mix, asset quality
trends, risk management and loan administration, changes in internal lending
policies and credit standards, and examination results from bank regulatory
agencies and the Company's internal credit examiners. Loans are charged off
when, in the opinion of management, they are deemed to be uncollectible.
Recognized losses are charged against the allowance and subsequent recoveries
are added to the allowance. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. The allowance for loan losses is reviewed internally by personnel
independent of the loan department. In addition, the allowance is subject to
periodic evaluation by various regulatory authorities and may be subject to
adjustment based upon information that is available to them at the time of their
examination.
SECURITIES
Securities (all classified as available for sale) decreased from $12,888,985 at
December 31, 2004 to $12,656,827 at June 30, 2005. At June 30, 2004, securities
totaled $12,860,270.
DEPOSITS AND BORROWED FUNDS
Total deposits averaged $138,283,062 in the second quarter of 2005, an increase
of $7,595,387 from the comparable 2004 quarter average of $130,687,675. As of
June 30, 2005, total deposits were $140,626,710, and included $122,978,762 of
interest bearing deposits. This compares to total deposits of $130,528,737 at
December 31, 2004, which included $115,513,433 of interest bearing deposits.
Total deposits at June 30, 2004, were $133,478,613, and included interest
bearing deposits of $119,106,637.
The Bank had $3,556,919 of deposits secured by securities sold under agreements
to repurchase on June 30, 2005. These obligations, which mature in one business
day, are swept daily from customers' demand deposit accounts. These balances
averaged $4,124,133 during the second quarter of 2005.
At June 30, 2005, the Company had established Federal Funds lines of credit
totaling $10,050,000 with four correspondent banks. The Company successfully
applied for membership in the Cincinnati Federal Home Loan Bank during 2000, in
order to be able to obtain advances and lines of credit from the FHLB. At June
30, 2005, the Bank had four outstanding FHLB advances totaling $14,000,000. The
first FHLB advance which was issued May 26, 2005, matures May 26, 2006 and has a
fixed interest rate of 3.90%. The second FHLB advance, which was issued June 9,
2003, matures June 9, 2006, and has a fixed interest rate of 2.03%. The third
FHLB advance, which was issued January 21, 2004, matures January 20, 2006, and
has a fixed interest rate of 2.21%. The final FHLB advance, which was issued May
2, 2005, matures May 2, 2007, and has a fixed rate of interest of 4.19%. The
Bank has a pre-arranged borrowing limit with the FHLB that is collateralized by
135% of unpaid principal balances of eligible 1-4 family residential mortgage
loans. At June 30, 2005, the Bank had available collateral to borrow an
additional $6.9 million from the FHLB.
CAPITAL RESOURCES AND LIQUIDITY
The Board of Governors of the Federal Reserve System has adopted risk based
capital and leverage ratio requirements for banks and bank holding companies.
The table below sets forth the Bank's capital ratios as of June 30, 2005,
December 31, 2004, and June 30, 2004, the regulatory minimum capital ratios, and
the regulatory minimum capital ratios for well-capitalized companies:
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June 30, December 31, June 30,
2005 2004 2004
----- ---- ----
Tier 1 risk based ........... 11.64% 11.80% 9.23%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 12.88% 13.00% 10.48%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 10.11% 10.00% 7.69%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
The table below sets forth the Company's ratios as of June 30, 2005, December
31, 2004, and June 30, 2004, the regulatory minimum capital ratios, and the
regulatory minimum capital ratios for well-capitalized companies:
June 30, December 31, June 30,
2005 2004 2004
----- ---- ----
Tier 1 risk based ........... 9.51% 9.43% 7.21%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 13.21% 13.55% 8.46%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 8.29% 7.99% 6.01%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
All capital ratios at the Bank and Company increased from June 30, 2004 to June
30, 2005, primarily as a result of the sale of Preferred Stock by the Company
during the third quarter of 2004, and the subsequent injection of capital into
the Bank. The sale of the Preferred Stock netted $7,659,340 to the Company. See
note 7 of the Notes to the Condensed Consolidated Financial Statements. All
ratios for the Bank and the Company are greater than the minimum capital ratios
for well-capitalized companies as of June 30, 2005.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the second quarter of 2005, the Company's
principal sources of funds have been the acquisition of customers' deposits,
repayments of loans, and other funds from bank operations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements, which are based on assumptions and
estimates and describe the Company's future plans, strategies and expectations,
are generally identifiable by the use of the words "anticipate," "will,"
"believe," "estimate," "expect," "intend," "seek," or similar expressions. These
forward-looking statements may address, among other things, the Company's
business plans, objectives or goals for future operations, our forecasted
revenues, earnings, assets or other measures of performance. These
forward-looking statements are subject to risks, uncertainties and assumptions.
Important factors that could cause actual results to differ materially from the
forward-looking statements made or incorporated by reference in this report
include, but are not limited to:
- the strength of the United States economy in general and the strength of the
Bowling Green economy in particular;
- changes in interest rates, yield curves and interest rate spread
relationships;
- deposit flows, cost of funds, and costof deposit insurance on premiums;
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- changes in the quality or composition of the Company's loan or investment
portfolios, including adverse developments in borrower industries or in the
repayment ability of individual borrowers or issuers;
- increased competition or market concentration;
- changes in tax or accounting principles; and
- new state or federal legislation, regulations or the initiation or outcome of
litigation.
If one or more of these risks or uncertainties materialize, or if any of the
Company's underlying assumptions prove incorrect, the Company's actual results,
performance or achievements may vary materially from future results, performance
or achievements expressed or implied by these forward-looking statements. Other
risks are identified in the Company's Form 10-KSB for the period ended December
31, 2004.
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ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2005, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on and as
of the time of such evaluation, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2005 in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There was no change in the Company's internal controls over
financial reporting identified during the quarter ended June 30, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on April 21,
2005. The following directors were elected to three year terms, ending
in 2008, with the vote totals as shown:
Votes for Votes withheld
Barry D. Bray 728,767 11,572
Sarah Glen Grise 733,753 6,586
Chris B. Guthrie 733,753 6,586
John T. Perkins 728,767 11,572
Wilson Stone 733,753 6,586
The terms of office of the following directors of Citizens First
Corporation continued after the Annual Meeting:
NAME TERM EXPIRES IN
---- ---------------
Jerry E. Baker 2006
Mary D. Cohron 2006
Floyd H. Ellis 2006
John J. Kelley 2006
Billy J. Bell 2007
Ken Hightower 2007
Joe B. Natcher 2007
Jack Sheidler 2007
There were no broker nonvotes on any of the items voted on at the
Annual Meeting.
Item 6. Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed as a part of this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS FIRST CORPORATION
Date: August 15, 2005 /s/ Mary D. Cohron
------------------
Mary D. Cohron
(President and Chief Executive Officer
(Principal Executive Officer)
August 15, 2005 /s/ Bill D. Wright
------------------
Bill D. Wright
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBITS
3.1 Restated Articles of Incorporation of Citizens First Corporation
(incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form SB-2 (No. 333-103238)).
3.2 Amended and Restated Bylaws of Citizens First Corporation
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form SB-2 (No. 333-103238)).
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation of Citizens First Corporation (incorporated by
reference to Exhibit 3.3 of the Company's Form 10-QSB dated
June 30, 2004.)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
10.1 Real Estate Sales Contract Between Martin Land Development
and Citizens First Bank.
10.2 Lease Between Citizens First Bank and Martin Management Group, Inc.
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